Apple: The Hand That Rocks The Cradle

| About: Apple Inc. (AAPL)

For all of the credit Apple (NASDAQ:AAPL) receives for its innovative ideas, whether it’s the iMac, iPhone, iPad, iTunes, iCloud, etc., it deserves equal respect for being clever or even sneaky. Its story is widely known and all of the acclaim and accolades are well deserved for what the company has essentially created and what I now call the “iWorld” (patent pending). But Apple does not get enough credit for what has become a recent pattern of running a shrewd business operation – or better yet, the puppet master of its competition.

The company systematically does things – whether through its words or the projects that it has chosen to take on - and it forces the competition to react – often in a manner that throws the competition off of its core competency. This is without them even realizing what they are doing. The end result is often predictable, because where there is a lacking in focus, there always lacking in success.

Masterful at Being Underhanded

The company is loved by its investors and customers – some might even say overly obsessed. Only Sirius XM’s (NASDAQ:SIRI) investors come close when discussing the passion generated from both the stock and product. However, on the flipside, Apple is hated and loathed by virtually all of its competitors – some might call it jealousy. But regardless of how you chose to define the reason for the hatred, the mere fact that the dislike is so intense serves as an effective tool to throw off its many rivals that have placed a target on its back.

Case in point: Last August I told you that I felt Apple forced Google (NASDAQ:GOOG) into a panic purchase of Motorola Mobility (NYSE:MMI). When I first read the news, the first question that entered my head was, what does Google know about hardware? This was one of the shoulder-shrug moments where the only answer defaults to the ever popular “we have to wait and see.” But the more I thought about it, the less sense it made. By doing this deal, not only is Google risking putting some of its software and services advantages in jeopardy, it had essentially become the competition to several of its partners by now becoming Android’s second biggest manufacturer.

Apple forced Google into this deal by seizing a significant portion of the smart phone and devices market by leveraging its advantages of having a unified platform – or controlling both the hardware and software. It is this type of device control that presented the harmony of many of its flagship innovations – precisely what the competition thrives to duplicate. But the evidence shows that they can’t. This created separation between Apple and the field - which in addition to Google also includes Research In Motion (RIMM), Microsoft (NASDAQ:MSFT) and even Hewlett Packard (NYSE:HPQ). This is despite each company investing a significant portion of its operating capital in R&D each year on projects that have gone nowhere.

So Why Does All Of This Matter?

The point of all of this is as we applaud the company for its brilliance in creativity and giving the market the growth that it craves, many continue to overlook and underestimate the company for mastering the art of competition – something that forces me to consider that Apple remains grossly undervalued.

Consider this: The current gap in its lead in (insert market here) is significant enough where its competition is only playing catch-up – essentially, squandering operational resources only to produce an equivalent product, or something close enough to not be laughed at. So as Apple forces these companies play “Simon says," its lead widens because these same firms are unable to look beyond what Apple is doing to make the sort of leap necessary to topple its empire – and Apple knows this.

Can Amazon Come to the Rescue?

A couple of weeks ago, I wrote an article suggesting that Amazon (NASDAQ:AMZN) was on its way toward being Apple’s No. 1 contender – a piece that turned out to have upset a lot of readers. I have to think that Amazon has a shot, albeit a long one. There is no doubt that the company will continue to dominate the ecommerce space for many years to come. But it clearly now demonstrates a track record for innovation and risk taking that rivals that of Apple and it is clearly not content with being No. 2, nor should it be.

As with Apple, Amazon has become successful in disrupting the way we buy our products and then convinces us that we also need the company to enjoy them. The Kindle Fire is one such example and I have to think that its creation was motivated by Apple and the iPad’s dominance. For as brilliant of a CEO is in Jeff Bezos, it is undeniable that Apple forced him to enter the tablet race – one where the pursuit has proven to not be as laughable as the other carnage left behind by Apple.

By the early success of the Kindle Fire, Amazon has shown not only that it has the ability to execute but it is also keen on its evolution into untapped growth areas – even those where there is a clear uncut leader. The fact of the matter is, as much hatred as Apple has received for its achievements, Amazon’s own recent Kindle Fire success has come with less revulsion from the competition – to the extent that many of them are even hoping that it takes a big bite out of Apple. But is it possible? And more importantly, can the bite be significant enough to throw Apple off of its core? Or in other words, give it a taste of its own medicine.

What is Apple Worth?

That is what every investor wants to know. But how do you place a value on a company that seemingly can do no wrong? I want to place a $520 target on the stock but that seems egregiously too conservative, especially now considering its skill at forcing its competition to do what it had not planned on doing - not to mention its enormous growth potential. I have begun to wonder where will the stock be in two or three years from now and the answer that I keep coming up with is a stock price valued between $700 to $1,000.

The reason being, I don’t think anyone can realistically say that the smart phone market has peaked. If Apple can achieve roughly 12% to 15% annual revenue growth for the next couple of years, the company will be able to generate almost $180 billion in annual revenue. Just imagine what that means for a second. Assuming a declining ratio of free cash flow conversion, Apple could end 2015 with nearly $39 billion in free cash flow. Assuming 6% cash flow growth beyond that, a market-matching discount rate, and adding in the cash on the balance sheet, suggests a target of at least $650.


Apple’s ability to rock the cradle of the competition is nothing short of brilliant. Just before you begin to think that you understand where it is going, as a great magician, it immediately convinces you that it’s doing something else. The end result for competitors often resembles the face of someone with eyes gleaming and mouth wide open.

The company continues to present the story that is just too good to be true. Incredibly, with Google, Microsoft, RIM, HP and now Amazon, the company remains in the cross hairs of five companies that have yet to realize they are being led on a wild goose chase, or at the very least trailing something that can’t be caught.

Disclosure: I am long AAPL, SIRI, MSFT.